A wash sale is a sale of a security at a loss and repurchase of the same or substantially identical security shortly before or after. Wash sale regulations protect against an investor who holds an unrealized loss and wishes to make it claimable as a tax deduction within the current tax year. The security is then repurchased in the hope that it will recover its previous value, which would only become taxable in some future tax year. A wash sale can take place at any time during the year. In the UK, a similar practice which specifically takes place at the end of a calendar year is known as bed and breakfasting. In a bed-and-breakfasting transaction, a position is sold on the last trading day of the year to establish a tax loss. The same position is then repurchased early on the first session of the new trading year, to restore the position. The term, therefore, derives its name from the late sale and early morning repurchase.
A wash sale is a transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain. Wash sales are a method investors employ to try and recognize a tax loss without actually changing their position.
The effectiveness of this strategy has been greatly diminished with the implementation of the IRS 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that investment was purchased within 30 days of sale (before or after sale).